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Home , Administration (law), Dissolution (law), Liquidator (law)

A guide to the Process

Appointment by the holder of a Qualifying (“QFCH”) What is administration?

Administration is a court process whereby one or more qualified practitioners are appointed to manage the affairs of a company [or partnership]. The advantage of this process is that it provides protection from the company’s whilst a plan or con- trolled disposal strategy is implemented.

The Administration process has been utilised by distressed companies since its in- troduction in 1986 and this legislation underwent an overhaul in 2003. The pur- pose of the new legislation was to encourage the use of business rescue mech- anisms in order to preserve viable businesses.

As a result of the 2003 legislation the Administration procedure has been made more accessible and streamlined, allowing a floating charge holder, the Company or its di- rectors, to appoint Administrators, in certain circumstances, without a court hearing.

The Administration process is governed by a number of Statutory Instruments. These are:

• The [“IA86”] • Insolvency Rules 2016 • The Enterprise Act 2002 • EC Regulation on Insolvency Proceedings 2000 • Small Business, Enterprise and Employment Act 2015

What is the purpose of administra- allowing a sale of the business and assets as a going tion? concern or through an orderly wind-down. Realising in order to make a distribution to one or The Administrators appointed have a duty to act in the best more secured or preferential creditors interests of the creditors of the company. Legislation sets Should the previous 2 objectives not be achievable then the out the purpose of the Administration and since the intro- Administrators’ objectives would be to realise the assets of duction of the Enterprise Act 2002 [effective 15 Septem- ber 2003] this has been split into 3 objectives. These are the business and distribute them, in accordance with the as follows: priorities defined by the IA86.

Rescuing the Company as a going concern If none of the 3 above objectives are achievable then The Administrators must perform their role to achieve this Administration would not be the appropriate process. If objective unless they consider that it is not practicable to Administrators are already appointed and it was established rescue the company as a going concern or that the second that one of the objectives could not be achieved, the objective (see next objective) would achieve a better result Administrators would seek an end of the Administration. for creditors. Who can appoint administrators? This objective would typically be achievable in situations where there are third party funds available to return A number of parties are capable of appointing Adminis- the company to solvency, usually from an investor in the trators. These are: company or through the proposal and acceptance of a Company Voluntary Arrangement [“CVA”]. • Qualifying Floating chargeholders • The Company Achieving a better result for creditors as a whole than would • The Directors be likely if the company were wound up • Justices chief executive for a Magistrates court If the first objective is not achievable then the second • One or more creditors of the company objective is to achieve a better outcome than a winding up • The supervisor of a CVA of the company. This is often facilitated by the protection of • A the moratorium provided by an Administration Order • A qualifying floating charge holder where the company is in compulsory winding up The process for the appointment of Administrators differs court application. depending upon the applicant. Outlined in the process of obtaining an administration order is the process for the appointment of As the ‘in-court’ process is relatively rare, this document only deals Administrators by a Qualifying Floating Chargeholder (“QFCH”). with the ‘out of court’ procedure. The summary of the process for an in-court application can be provided upon request. Creditors who are holders of fixed rather than floating charges are creditors of the Company and as such can utilise the ‘in court’ Enforceability of charge procedure should they wish to do so. The charge must be enforceable for an Administration Order to be obtained. This is typically achieved through the issue of a demand What is a Qualifying Floating Charge? for the repayment of the outstanding balance. Provided time is given to the Company to repay the amount concerned and that A QFC is defined as an instrument which: the payment is not received this normally enables the charge to be enforced. It may be necessary for legal advice to be obtained • States that paragraph 14 of Schedule B1 of the IA86 applies for non-standard floating charges to ensure that the document is (Power to appoint an Administrator); or enforceable. • Purports to empower the holder of the floating charge to appoint administrators of the Company; or Notice of intention to appoint • Purports to empower the holder of the floating charge to A Notice of Intention to appoint is completed where the Company make an appointment which would be the appointment of has prior ranking Qualifying Floating Chargeholders. These include an Administrative Receiver and on its own or together with both QFCHs who hold floating charges dated prior to that of the other charges, the floating charge relates to the whole or seeking the appointment and where there is a priority substantially the whole of the Company’s property and the agreement in place providing priority to another QFCH. charge is enforceable. At least two business days notice must be given to the prior Those creditors who hold floating charges dated prior to 15 raking chargeholders. The prior chargeholders may consent to the September 2003 may be in a position to appoint an Administrative appointment, remain silent or seek the appointment of their own Receiver as an alternative to an Administrator. There are respective Administrator or Administrative Receiver (if their charge pre dates advantages and disadvantages of the two differing processes and 15 September 2003). if in doubt professional advice should be sought as to which process is most appropriate for the circumstances. Should the Company require the protection of the moratorium during this interimYou provide period your the goods notice and of intention to appoint an When can administrators be appointed? Administrator is filedservices at court. as normal to your customer Under most circumstances Administrators can be appointed by a Interim moratorium QFCH using the out of court procedure. There is no requirement In the period between completion of the Notice of Intention for the Company to be insolvent but, as above, the charge must to appoint an Administrator and the appointment, an Interim be enforceable. There must therefore have been some triggering Moratorium may be obtained through the filing of the Notice of event under the terms of the security such as the receipt of a Intention to AppointYou in Invoice Court. your customer notice of intention to appoint an Administrator by the Director/ as normal Company, failure to repay a demand, etc. Upon the filing of this document the Company is protected from action from its creditors (excluding prior ranking QFCHs), without However, if any of the following apply then appointment of the express leave of court. The Moratorium exists for a maximum Administrators may not be possible or an application to court would of 5 days. be required: Send your invoices to the in- Appointment of administrator voice finance provider who • If a Provisional Liquidator is in office; or Following receipt of the consent, or in the absence of an objection • If the Company is in ; or from the prior rankingwill advance chargeholder a percentage (and of at the expiry of the two • If an Administrative Receiver is already in office. clear days notice period), thethe Administration invoice Order may be made.

Who can be appointed administrators? Where no prior raking chargeholders exist the notice of intention to appoint and the interim Moratorium can be dispensed with and a notice of appointment together with statements from the Only persons who are licensed Insolvency Practitioners can act Customer pays invoice and proposed Administrators filed in court. as Administrators. The Administrators must be independent of remaining percentage is the company and ensure that there are no actual or perceived It is possible where timingreturned is critical,to you for an appointment to be made conflicts of interest. out of hours through the filing o an appointment document in court The Process for obtaining an by fax. administration order - By QFCH Upon filing the relevant form the Administration becomes effective.

Type of application In the majority of circumstances a QFHC can utilise the streamlined out of court procedure. A full court application and hearing is required if a winding up order has already been made but the mere presentation of such a petition does not prevent an out of order Matters following appointment The existing lenders would normally be contacted at an early stage of the process to explain the benefits of continued trading and to Moratorium determine whether they would be prepared to fund it. Upon the granting of an Administration Order no legal process or proceedings may continue against the company unless permission Employees is obtained from court or the consent from the Administrators is As indicated in the trading section it is often necessary to make the obtained. difficult decision to make a number of employees redundant in order to reduce costs. The cost reduction exercise is often necessary to This moratorium protects the company against action from ensure the business’ survival through the Administration process. creditors who may wish to wind the company up or repossess goods (such as leased assets, stock subject to retention of title or Employees who are made redundant will normally qualify for a landlords wishing to issue distress). payment of redundancy, arrears of wages, holiday pay and pay in lieu of notice from the government’s National Insurance Fund. The The moratorium also protects the Company against other secured Administrators will issue the affected employees with the forms to creditors and prevents the appointment of Administrative Receivers make such a claim. These payments are subject to weekly wage cap and fixed charge receivers. The latter of these can be appointed with any balance ranking alongside other creditors of the Company. with the consent of the Administrators or leave of court. Insurance of the assets Management of the business Upon appointment the Administrators will consider the insurance position and either seek to maintain the existing policy or obtain Following the appointment the Administrators or their staff will a new policy. Insolvency Practitioners have access to open cover normally attend the company’s sites to take control of the business. policies for most types of industry ensuring that, should a new policy The Administrators, by statute, act as at all times as agents of the be required, cover can be obtained immediately to protect the company and without personal liability. assets of the Company.

The employees would be addressed and the impact of the Strategy Administration explained. Typically the existing management lines would be retained but any commitments would need to be There are a number of strategies that the Administrators would authorised by the Administrators’ staff. consider in order to achieve the objectives of the Administration. The primary options are listed below: Reporting lines and processes for ordering goods, etc. would be set up should it be considered beneficial to continue the business Company Voluntary Arrangement [“CVA”] during the Administration and funding is available. Should it be considered that creditors may accept a proposal for a voluntary arrangement and that the Administrators consider that it Trading would be in the creditors’ interest to do so then it is likely that in the The Administrators often utilise the first few days to establish early stages the Administrators will review the possibility in more whether it is feasible and beneficial to cause the company to detail. This would involve speaking to key creditors to determine continue to trade although in certain circumstances it may have whether they would support a proposal and drafting the detailed been possible for the proposed Administrators to undertake this documentation. review and planning prior to the appointment. Sale of the business The decision to continue to trade is dependent upon a number of The Administrators may undertake a period of marketing of the factors; business as a going concern. The business is typically continued during this period under the control of the administrators but this is • The benefit to creditors of doing so; subject to the constraints in trading the business. • The working capital requirements and the funding [if any] available; Customers, competitors, management and other interested parties • Health and safety, insurance, and environmental or industry would be approached and adverts may be placed in relevant specific legislation; publications. Some of these parties may attend the site in order • Support from employees, customers and suppliers; and to undertake due diligence work. The Administrators will normally • The detriment to creditors of not continuing to trade. set a deadline for offers. The timing of this is dependent upon the trading position in the Administration and the effect of a delay on The decision as to whether to continue the business is a balancing the goodwill of the business. act and if it the decision is taken to do so it may be for a limited period. It is also possible that a number of cost cutting measures Any such sale would typically involve a purchase of the goodwill, may be necessary such as employee redundancies. business and assets of the company and the purchaser would not acquire the majority of creditors [some employee liabilities and The funding for the trading may come from a number of sources: certain others may transfer].

• Proceeds from disposal of floating charge assets; Controlled wind down • Customers, e.g. paying on a proforma basis This strategy may be implemented should a sale of the business • Suppliers e.g. through credit terms; and as a going concern be unachievable or it may be the objective of • Banks or secured creditors e.g. through repayable or non- the Administration in order to realise assets for the benefit of the repayable loans, provision of overdraft or invoice discounting secured or preferential creditors. facilities. This would involve the Administrators instructing agents to dispose creditors and the IA86 defines the priority of payments. of the company’s assets in the most appropriate manner and these would be sold off to one or more parties. Fixed Charge Creditors Where the Administrators dispose of assets subject to fixed charg- Statutory matters es, the proceeds (less costs) are available to the fixed chargehold- ers. Provided the security documentation is valid, these funds can There are a number of matters that, under Insolvency legislation, be paid over to the secured creditors without approval of creditors the Administrators must undertake following their appointment. or court.

Notification to creditors Preferential creditors It is a legal requirement under the Insolvency Act that notice be Since the introduction of the Enterprise Act 2002, the Inland given in the London Gazette. The costs of placing this advertisement Revenue and Customs and Excise (now known as HM Revenue & are met as an expense of the Administration. Customs) no longer have preferential status. Therefore the primary preferential creditors relate to employee and certain pension Notice needs to be dispatched to the members and creditors of liabilities. the company within 28 days of the granting of the Administration Order. Assets that are not subject to fixed charges are made available to the preferential creditors in priority to the floating chargeholders Statement of affairs (and after costs). The directors are required to provide the Administrators with a Statement of Affairs within 11 days of receipt of the notice requiring Prescribed Part it. The Statement of Affairs summarises the Company’s assets, The funds available (if any) after paying the preferential creditors their anticipated realisable value and the Company’s liabilities. It are subject to what is known as the Prescribed Part. The purpose also contains a list of creditors and shareholders of the Company. of this fund is to make the amounts lost to preferential creditors This document is filed at Companies House and is provided to as a result of the abolition of Crown Preference available to the the creditors of the Company at the initial meeting (see creditors’ unsecured creditors (thus by-passing the floating chargeholders). meeting below). This fund is only applicable to QFCHs who have charges dated after 15 Administrators’ proposals September 2003. Those with charges prior to this date benefit from the loss Within eight weeks of their appointment, the Administrators must set out of Crown Preference and do not suffer from the allocation of funds to the and circulate proposals for achieving the purpose of Administration, which Prescribed Part. must include an explanation, where applicable, of why objectives cannot be achieved and the proposed basis for their remuneration. The Prescribed Part is an amount set aside for the unsecured creditors and is calculated based upon the amounts available for the floating chargeholders Committee Meeting as follows: The creditors must be asked with each notification whether they wish to appoint a Creditors’ Committee. • First £10,000 – 50% • Next £2,975,000 – 20% The committee must have at least three and not more than five members. Any creditor of the Company is eligible to be a member This results in a maximum Prescribed Part of £600,000. It may be possible to of the committee, so long as his or her claim has not been rejected dispense with the Prescribed Part should the Administrators consider it to for the purposes of being entitled to vote. The function of the be cost ineffective to distribute the funds, otherwise the amount set aside is committee is to generally assist the Administrators in discharging payable to the unsecured creditors. his duties. The committee often acts as a sounding board for ideas, and in addition it will monitor the further progress towards a Floating charge creditors conclusion of the Administration. Any funds available after the payment of the preferential creditors and after deducting the Prescribed Part (if applicable) are available for the floating Costs and remuneration charge creditors. Under the IA86, the Administrators are empowered to make a distribution to floating charge creditors without reference to the The creditors decide the basis for the remuneration of the Administrators creditors or court. and this can be on a time cost basis, as a percentage of realisations, as a set amount or a combination of theses bases. Unsecured Creditors Typically, should there be funds to pay a distribution to unsecured creditors The costs and remuneration incurred by the Administrators in the other than by way of a Prescribed Part, the Administrators would seek to do performance of their duties is payable out of the assets realised. this by placing the Company into liquidation (see 11.3 below). Similarly the costs incurred in obtaining an Administration Order are payable out of the assets of the company. The costs of the Admin- istration also include certain unavoidable costs such as taxation on chargeable gains, legal and agents costs etc. These, together with the remuneration of the Administrators, form an expense of th Ad- ministration and are taken off prior to the distribution to creditors. Distribution to creditors

Administrators have the power to make certain distributions to This is typically used as an exit route where there are no funds to Ending administration distribute but there are matters for a liquidator to consider such as antecedent transactions. There are a number of routes to ending an Administration. The routes are as follows: The Administrators obtain their release from liability from unsecured creditors, the court or in certain circumstances from the secured Automatic end creditors. The Administration automatically ceases after one year, or sooner if the purpose of Administration has been achieved, or cannot About Moorfields be achieved or a creditors meeting so requires. The creditors of the company or court may agree to an extension of this period At Moorfields, we understand that any business – no matter what its size – (although the former of these parties can only extend the period can experience a reversal in fortune. We also know that when things are tak- for a maximum of twelve months). ing a turn for the worse, innovative thinking is as important to your survival as capital. And that’s exactly what we offer. The Administrators may file papers to say that the Administration We’re business owners ourselves, so we know all about the pressures of try- has come to an end and that dissolution of the company is most ing to keep your stakeholders happy. We’ve also got years of experience in appropriate. The company will be dissolved 3 months following the the world of finance, so we know a thing or two about keeping companies filing of the documents. afloat.

This exit route is used should there be no funds available for a But our innovative thinking isn’t just about expert business advice. It’s distribution to unsecured creditors and there are no outstanding about breaking the mould of insolvency and rescue practitioners: helping matters that a liquidator may need to consider. you through your problems, treating you like a human being, and actually understanding exactly what you’re facing. Creditors Voluntary Liquidation [“CVL”] Where the Administrators think that they have paid or set aside We’ll never surprise you with last-minute charges, because our fees are sufficient to pay all secured creditors in full and there will be a totally transparent (and actually quite affordable). We’ll also never try to surplus distributable to unsecured creditors, they file a notice to force you into a one-size-fits-all solution. Because we get it: your business that effect. On registration of this notice, the Administration will is unique. end and the company will automatically go into CVL (some of the normal statutory provisions being disapplied and thereby avoiding Finally, we’ll never back out when the going gets really tough. We do what the need to pass shareholders resolutions at a general meeting we say we’ll do. And whatever happens with your business, we’ll be here to of shareholders). Whilst the creditors may nominate a different help you every step of the way. liquidator, in practice the Administrators usually become the liquidators thereby ensuring continuity and reducing costs.

Compulsory Liquidation In certain circumstances the Administrator may apply to court for the company to be placed into Compulsory Liquidation. The Administrators may seek appointment as Liquidators or the or other may undertake this task.

If you would like to discuss how Moorfields can assist you with an Administration or any other issues please contact

Simon Thomas: T: 020 7186 1144 E: [email protected]

Moorfields, 88 Wood Street, London, EC2V 7QF Tel: +44 (0)20 7186 1144 Fax: +44 (0)20 7186 1177 Web: moorfieldscr.com Email: [email protected]

Disclaimer This guide is prepared as a general guide only. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author or publisher. Always seek professional advice before acting. Moorfields Advisory Ltd is registered in England and Wales No 8910792 The institute of Chartered Accountants in England and Wales authorises Simon Thomas, Arron Kendall and Nicholas O’Reilly to act as insolvency practitioners in the UK under section 390(2)(a) of the Insolvency Act 1986. Office Holders acting as Administrators or Administrative Receivers manage the affairs, business and property of the subject to the appointment and contract only as agent of the debtor and without personal liability. Office Holders acting as Receivers manage the property of the Mortgagor and contract only as agent of the Mortgagor and without personal liability.